It's finally here – the Blackstone Group LP (NYSE: BX) IPO. The stock is up about 15% even though the Dow is down 116 points. There are also serious concerns about some ailing hedge funds from Bear Stearns (NYSE: BSC).I had a chance to interview Steven Howard, who is an attorney at Thacher Proffitt & Wood and an expert on private equity. His thoughts on the Blackstone IPO?
"It's of course difficult to predict the length of business cycles for sectors of the economy, but most commentators agree that the business cycle for private equity is mature, and that Blackstone is cashing out at the top. I believe that the top has not yet been reached, that Congress will not legislate any curtailments to the private equity/hedge fund business until at earliest the first quarter of 2008, so there is plenty of time for others in the IPO pipeline, like KKR, Apollo and others to explore the top. Nevertheless, Blackstone's IPO is very lucrative to Pete Peterson and Steve Schwarzman, and their senior managers. Just as Blackstone has wisely accelerated their IPO, so will the next group of IPO registrants in the rush to the market in the hope that they may get some 'grandfathering' benefits from any legislation, if in fact it is enacted in 2008.
"These private equity funds are notoriously difficult to value because of the nature of their investments which are illiquid and often require a sale to a third party before the private equity fund realizes any gains or losses from the investment. As a consequence of the difficulty to value the underlying investments, Blackstone may trade at a discount to its NAV (net asset value) over time, as closed-end funds typically trade at a discount to NAV in the aftermarket following their IPOs.
"Interestingly, investors in Blackstone will not be entitled to vote on who the managers of the Fund will be. Because the Fund is structured as a partnership, there is no equivalent of a Board of Directors. Peterson and Schwarzman will run the Fund until Peterson retires in December 2008 when Schwartzman will run it solo. Blackstone says in its Registration Statement that it did not want to change in any way its management since it's been so successful, so no shareholders' meetings ever, very limited corporate governance by public company standards and very little protection from conflicts of interest.
"A final note, it is a major mistake for anyone to underestimate the strength of the private equity/hedge fund lobbyists in Washington, DC, especially with a presidential election year in the very near future in which it is likely that THREE candidates will be from NYC (Clinton, Giuliani and Bloomberg), the home for many private equity and hedge funds, including, of course, Blackstone."
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
